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The US Federal Reserve's expansion of its securities lending program was met with a mixed reception by economists and strategists, a marked contrast to the enthusiastic response it got in the markets yesterday.

The Fed's plan is to create a longer lending facility for primary dealers—including banks and brokers—to exchange asset-backed securities for Treasury securities in an effort to provide liquidity and relieve pressure on the credit markets

The Term Securities Lending Facility provides up to $200bn (€130.3bn) to 20 primary dealers in exchange for various types of AAA residential mortgage-backed securities as well as government sponsored debt for a 28-day period.

Not surprisingly, the market response was dramatic with the Dow Jones Industrial Average surging 416.66 points, or 3.6%, to 12,156.81, its largest percentage climb since March 2003. The Standard & Poor’s 500 and Nasdaq Composite Index also rose to their highest levels in more than five years, and it marked the fourth largest point increase on the Dow to date.

However, economists and analysts had mixed views of the Federal Reserve’s move.

Merrill Lynch economist David Rosenberg acknowledged the action “injects a lot more Treasury collateral into the repo markets,” which primary dealers could lend out, creating liquidity.

Although the Fed’s “extraordinary and unprecedented” steps added up to $436bn in pledges of liquidity, including the $36bn foreign currency swap agreements, this was relatively small compared to the $6 trillion total mortgage-backed securities market, Rosenberg added.

Last Friday, the Federal Reserve increased the size of the Term Auction Facility to $100bn and said it would carry out a series of term repurchase transactions for asset-backed securities that would add up to $100bn.

George Goncalves, chief treasury strategist at Morgan Stanley in New York, welcomed the Fed's action as a "funding booster."

Goncalves said: “It provides a much needed though just temporary buyer of high quality mortgage-backed securities, which the Fed could not do in its regular repo operations.”

Repos provide a short-term borrowing facility for dealers. The dealer sells the securities to investors, often overnight, and buys them back the following day. The difference in the sell price and the buy price is the interest paid for financing the security.

TJ Marta, a New York-based fixed-income strategist with the Royal Bank of Canada, noted that while it will not help over-valued securities, the Fed's move will allow the markets to function in an orderly manner rather than having fire sale events. But he added it only solves part of the problem.

Marta said: “It’s like a car accident trauma patient who keeps going into cardiac arrest. You resuscitate the patient and it’s a great day, but it doesn’t mean the underlying problem is any closer to being fixed.”

Peter Dixon, an economist at Commerzbank in London, said that from one point of view, it provides a way to give institutions time to get their balance sheets in order but warned that it would not prevent a recession.

Dixon said: : “… This measure can be seen as one way in which the Fed starts to mop up the 'junk' which exists on the balance sheet of financial institutions… The quicker this process is completed, the more quickly will financial institutions begin to function normally and the more quickly the economy will recover.”